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1. Srikant Rajan Contact: email@example.com, +91-9962552824 2. Vivek Prabhu Contact: firstname.lastname@example.org, +91-9380254288
This paper attempts to identify the dominant variable during recessionary times and analyze its impact vis-à-vis success factors for a high performing value chain. We then analyze the modifications desired in the value chain for recessionary times.
Similarly we analyze impact on company strategy and evaluate possible alternatives to overcome it. We then craft out a specific recommendation, keeping in mind the alignment of the former value chain strategy and latter company strategy.
Green Supply Chain Management as a Strategic Tool in Recessionary Times
I. Impact of Recession on Value Chain
Recessionary times are characterized by decreased consumption. Additionally the demand patterns are highly erratic and volatile, for instance, output in the steel industry dropped by an unprecedented 30 percent and prices by about 50 percent from June 2008 to December 2008.1 Such demand patterns, pose a challenge in market demand forecasts. This is due to the fact that forecasting models are predominately based on historical demand patterns, with random patterns eliminated to get a trend line. The forecasting challenge is particularly acute as in many upstream industrial settings, as supply partners along the chain anticipate decreased demand, the chain kind of decouples from downstream consumption which is the backbone of most forecasting models. In essence your product is not being consumed, whatever is being consumed is showing a highly volatile pattern so the focus should be more on making the delivery pattern more responsive, that is following a pull based system. However, the chain responsiveness is dependent on the number of links in the value chain as distortions in information, snowball along the length of a company’s value chain. (Bull Whip Effect).
Responsiveness however comes at a cost. For instance, to respond to a wider range of quantities demanded one alternative could be to increase the capacity, which in turn increases cost. Value chain efficiency is the inverse of cost of making and delivering a product to the customer. Hence the more responsive a chain becomes the less efficient it is. Hence in recessionary times an optimum tradeoff needs to be achieved between value chain efficiency and its responsiveness. The following table highlights some of the characteristics of a supply chain relevant in recessionary times:
Building a flexible supply chain for uncertain times, March 2009, The McKinsey Quarterly
Exhibit 1 - Tradeoff Analysis Responsive vs. Efficient Chains Efficient Primary goal Product design strategy Lowest cost Minimum product cost Responsive Quick response Modularity to allow postponement Pricing strategy Manufacturing strategy Inventory strategy Lead time strategy Lower margins High utilization Minimize inventory Reduce but not at expense of greater cost Supplier selection strategy Transportation strategy Cost and low quality Greater reliance on low cost modes Higher margins Capacity flexibility Buffer inventory Aggressively reduce even if costs are significant Speed, flexibility, quality Greater reliance on responsive (fast) modes
Consider the factors highlighted in the above table. The ideal chain would incorporate desirable characteristics of an efficient and responsive chain. • • • • • The product delivered should be low cost, delivered as quickly as there is demand for it. The manufacturing unit must be flexible to handle variations in volume Buffer stock at key locations to reduce Bull Whip effect Creation of a fast and low cost mode of transport Maintain the existing margin, do not cut price, aim to provide additional value
Increasing the chain responsiveness can be done by reducing the number of links in the typical producer, wholesaler, ware house, retailer chain. However, reducing the links by cutting down the number of retailers would also reduce coverage and thus negatively impact the market share particularly in the FMCG sector. Wholesaler decrease may be viable in say goods such as paints but direct transportation to the retailer would involve a sizeable investment in resources such as manpower that would offset the advantage of decreasing the bull whip effect.
II. Strategy Analysis
Exhibit 2 - Strategic planning process •
Mission o o Reason behind organization existence Long term
Vision o Evaluation of current position and establishment of the target position in light of the defined mission o Long term
Design o o The methodology for achieving the vision For Instance - low cost, mass customer and emerging consumers
Plan o o Establishment of objectives under the defined methodology Tactical & short term
Implementation o o Allocation of SBU wise functional plans (Product, Marketing and supply chain), Allocation of resources and responsibilities.
In the light of the above process, consider the example of Asian Paints, India’s largest and Asia’s third largest paint company today.
Asian Paints is following a methodology (Design) of ‘going where the customer is’. The company provides its customers with a service interface i.e. large dealer network. With a limited set of bases and colorants, manufactured and transported throughout its supply chain, Asian Paints provides a choice of over 1000 shades to the customer through a technology of tinting at the last retail store.(Product Variety)
The company also introduced ‘Asian Paints Home Solutions’ which provides painting services in addition to the paint. (Product and Service Bundling)
The reason of existence of Asian Paints i.e. its mission is: ‘To provide paints as per market demand, ensuring desired level and quality of customer (dealer) service, continued availability of the right product mix of right quality at the right time.’
By comparing itself with its industry environment Asian Paints has set itself a target position i.e. Vision: ‘Asian Paints aims to become one of the top five Decorative coatings companies worldwide by leveraging its expertise in the higher growth emerging markets. Simultaneously, the company intends to build long term value in the Industrial coatings business through alliances with established global partners’. As described above (Exibhit1) vision are aspirations expressed as strategic intent.
Thus from the analysis above we infer that the competitive strategy of the company that directs it towards its vision is: • •
Product Variety Product Bundling (Asian Paints Home Solutions)
The above competitive strategy is built on its resources viz. • • •
Supply chain connecting its plants, suppliers, vendors Distribution and processing centers Technology
The consequences of recession highlighted in part 1, on Asian Paints would be the implied demand uncertainty in its supply chain. For instance the retailers would be unable to project the likely demand. This inability in forecasting would amplify over the value chain (bull whip effect) right to the manufacturing plant. This in turn would lead to inventory build up of raw materials, finished products, thereby locking up of valuable capital.
Thus the company has the following two options:
1. Reduce Short Term Cost Cut down on existing resources such as the production capability and focus on a no frills least cost product and utilize the savings so incurred to aggressively market the product. However this process reduces value provided to the customer.
Additionally the above process is not optimum as this does not lead to effective utilization (reducing the rate of fixed cost recovery) of the existing resources and lowers overall productivity.
2. Reduce Long Term cost Provide a new value proposition to the customer and enhance productivity
Next, consider the following regarding recession:
1. A transient phase Since the product variety of the company is its competitive strategy and the source of its profitability, changing the product spec altogether would not be appropriate in a transitory period such as recession.
2. Lead to development of a mismatch between allocated resources and established plans The recession can be considered to be an opportunity, a wake up call for the firm to reduce long term costs throughout its supply chain by leverage its existing resources2 ,focus on enhancing productivity getting more bang of each buck spent.
Strategy as Stretch & Leverage, CK Prahlad & Gary Hamel, Harvard Business Review, March – April 1993
Mission and Vision
Supply Chain Strategy
Alignment for Profitability
This leverage can create a new value proposition that would benefit its customers and simultaneously realign its supply chain and competitive strategy without loss of profitability. Thus leveraging resources can create a competency that is core, which in turn can create a competitive advantage.(Exhibit 3)
III. Green Supply Chain Management (GSCM)
Green Supply Chain Management (GSCM) is an approach that incorporates environmental thinking into the supply chain. GSCM takes into account the entire product life cycle and propagates green thinking post final product delivery, as potential cost reduction measures.
Emphasis on recyclable material leads to significant cost reductions, for instance General Motors reduced disposal costs by $12 million by establishing a reusable container program with their
suppliers3. Additionally such measures would not incur an increase in net life-cycle costs; the decrease in material usage compensates the investment required in maintaining the reverse logistics chain4. However the cost benefit is not immediate, rather long term.
Adapting sustainable measures in the supply chain would mean adherence to regulations and an improvement in the brand reputation. Cost reduction and creation of a distinctive value proposition to the user not withstanding, GSCM measures clearly differentiate products from competitor products, which in turn may aid in creation of a suitable targeted marketing strategy.
GSCM approach in the Indian consumer goods industry could be utilization of recyclable paint cans, procured from the end customers. A discount offered for every paint can returned, would entail a superior value proposition to the customer.
One method to implement this reverse product flow would be to create strategic pickup points specifically for used product flow. However, the challenge in implementation of this approach would be: • • • • • Increase in procurement costs of reusable containers Costs involved in transportation, post product use Managing inventory, both forward that is packed and empty paint containers Sorting and repair of containers Inspection and cleaning costs before reuse
Consider another alternative this time with regards to the case of Asian paints and its resource base. Asian paints distribution and processing centers in supply chain connecting its plants, suppliers, and vendors is unique in terms of the reach. The same chain may be leveraged for reverse product flow. However not all of the challenges cited above are mitigated by using this approach. Additionally this process would be complex in nature and require modification in facility design and may also need augmentation of capacity again.
Energy savings and the Environment, November 2008,IBM Retail Solutions Climate Change and Supply Chain management , July 2008, The Mc Kinsey Quarterly
This complexity may be reduced by channel segmentation. The channel may be segmented on the basis of buy viz industrial and retail buy. These in turn differ in the following aspects: • • •
Concentration of buyers Frequency of purchase Volume of purchase
For an ideal reverse product flow the frequency should be low to enable ease in product flow, volume should be high to realize scale economies and concentration should be region specific to leverage resources with minimum modifications. Thus the reusable container program may be initially implemented with large volume low frequency industrial buys.
Such buys in turn may be variations of modified Rebuy which are characterized by rational buying behavior and thus the focus on cost reduction may be suitably exploited.
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